x Abu Dhabi, UAEWednesday 26 July 2017

AirAsia is staring at a turbulent take-off

AirAsia, which will launch its India operations on Thursday, is set to enter a sector beset with mounting losses by its rivals. Can the new entrant be able to buck the trend?

An AirAsia Airbus A320 passenger jet. Enny Nuraheni / Reuters
An AirAsia Airbus A320 passenger jet. Enny Nuraheni / Reuters

AirAsia India is set to take to the skies with its first flight on Thursday, entering an industry of fierce headwinds in which existing carriers are struggling with heavy losses. The no-frills airline has already created turbulence in the market. It announced its launch with just two weeks’ notice and is offering discounted fares as low as 990 rupees (Dh61), while price wars were already taking place within India between the plethora of local carriers. Its inaugural flight between Bangalore and Goa sold out within ten minutes of bookings opening, according to AirAsia India.

The Federation of Indian Airlines, a lobby group for domestic carriers, has also challenged the start-up, asking authorities to prevent AirAsia India from launching operations and saying that its presence would be at the cost of the local industry.

AirAsia India sold 25,000 seats within 48 hours of launching bookings.

“Some airlines [are] scared of us,” Tony Fernandes, the group chief executive of AirAsia, tweeted on May 31. “Help us people of India. Don’t let cartels win and not let ordinary man fly.”

The budget carrier is a joint venture between the Malaysian airline, AirAsia and the Indian conglomerate Tata, along with Telstra Tradeplace, an investment holding company of the New Delhi-based businessman Arun Bhatia. Regulatory hurdles meant that the carrier’s launch was much-delayed.

This venture became possible after New Delhi in September 2012 opened the aviation sector to foreign direct investment of up to 49 per cent by overseas carriers for the first time.

“In the short term, AirAsia India will be pushing home pretty hard these low fares so that it gets some sort of customer loyalty built up,” says Saj Ahmad, the chief analyst at StrategicAero Research.

He points out that India presents an extremely difficult environment for airlines to operate in, with steep taxes and high airport costs.

“In a country where less than 3 per cent of the population uses air travel, this will be hard to maintain profitably because other Indian airlines are struggling with capacity, abject management teams and next to no desire to change structurally to drive up load factors, decrease costs and aim for profitability.

“AirAsia India will have to find a way of getting airport costs, access and services at competitive prices. This is not easy in India. All AirAsia India will do is be another eater of the pie while reducing footfall for others and that will push profits and prices down.”

There is more competition on the way – Tata also has another carrier in the pipeline. It has teamed up with Singapore Airlines to launch a full-service airline, of which it would own 51 per cent and Singaport Airlines the remainder.

Competition is set to be aggressive with AirAsia India’s launch, the Centre for Aviation (CAPA) says.

Jet Airways, in which Abu Dhabi’s Etihad Airways has a stake, and the low-cost carrier SpiceJet both posted record losses in the financial year ending in March.

“The industry as a whole is expected to report a combined full-year loss of approximately US$1.5 billion,” CAPA says.

“AirAsia may have underestimated the capacity of Indian carriers to pursue irrational pricing,” it adds. “The incumbents have shown a regular tendency to discount heavily to generate cash, gain market share, fill excess capacity or simply to respond to competition.

“This is also a market in which full-service carriers offer fares similar to low cost carriers, and sometimes lower. Airlines continue to price below cost despite their huge accumulated losses and weak balance sheets. It is very difficult to operate in a market in which your competitors seem to have an almost insatiable appetite to lose money. Over the past seven years Indian carriers have lost a combined 594bn rupees, or an average of $22 every time a passenger boards an aircraft.”

Sanjay Kaul, an executive at Laureate Education, says that the issue is whether AirAsia can implement its existing model in India as it aims to be more budget than the existing budget airlines. At the same time, with high fuel prices and taxes out of its control, it would have to carefully balance its costs and prices, he adds.

“Low-cost carriers have proven to be more successful than full-service carriers [in India],” Mr Kal says. “What remains to be seen is the change in low cost carrier model with the entry of AirAsia. The domestic players being a hybrid between low-cost carrier and full-service carrier, offering more services than a traditional low-cost carrier, AirAsia intends to enter the Indian markets with its successful Malaysian plan.”

Budget hotel chains welcome the launch of AirAsia India, hoping that the airline might be able to attract Indian travellers who previously had not been able to afford to fly before, boosting travel flows within the country, which has a population of 1.2 billion.

“With their affordable pricing, they are likely to not only get air travel within the reach of the masses, but will open new sectors that have not been tried before,” says VV Giri, the regional director of operations for Premier Inn South Asia.

“This will mean more people will travel to more destinations than ever before. This should have a favourable impact on the overall hospitality industry and even more interestingly open up tier-two and tier-three cities, which have so far been viewed as not very attractive markets,” he adds.

“Also, the initial routes along which AirAsia India will be flying are Bangalore-Goa and Bangalore-Chennai. Given that their flights will be originating or terminating out of Bangalore, we hope that this will drive up occupancy at our Premier Inn property in the city.”

SpiceJet says that Indians travelling on a budget already have a number in terms of low-cost carriers connecting destinations in the country.

“People of India already have more choice than the people of Malaysia when it comes to airlines,” tweeted Sanjiv Kapoor, the chief operating officer of SpiceJet. “And we [have] leather seats, hot meals, and low-fare sales and promotions too.”

Mr Ahmad also questions the role the new carrier will play in the Indian market, pointing to the demise of Kingfisher Airlines, which stopped flying in 2012 after never turning a profit.

“AirAsia India brings nothing new here apart from glitzy headlines and catchy buzzwords,” says Mr Ahmad. “The last airline that followed that pattern was Kingfisher – and look where they are now.”

business@thenational.ae

Follow us on Twitter @Ind_Insights